603 F.

2d 234

Fed. Sec. L. Rep. P 96,617, Fed. Sec. L. Rep. P 96,936

Alfred KIRSHNER, Plaintiff-Appellant,
v.
UNITED STATES of America, Secretary of the Treasury,
Commissioner of I. R. S., Alvin D. Lurie, in his capacity as
Assistant Commissioner Employer Plans and Exempt
Organizations, I. R. S., Bernard Golberg, Reuben Mitchell,
Joseph Shannon, Robert Christen, Victor Condello, Harrison
J. Goldin, James Regan, Individually and as trustees of the
Teachers Retirement System of the City of New York, and
Isaiah Robinson, Defendants-Appellees.
No. 315, Docket 77-6104.

United States Court of Appeals,

Second Circuit.
Argued Jan. 18, 1978.
Decided Nov. 30, 1978.
Certiorari Denied May 29, 1979.
Rehearing and Rehearing En Banc Denied July 19, 1979.
See 99 S.Ct. 2821.

Alfred Kirshner, appellant pro se.

Kent T. Stauffer, Asst. U.S. Atty., New York City (Robert B. Fiske, Jr.,
U.S. Atty., S.D.N.Y., Patrick H. Barth, Asst. U.S. Atty., New York City,
of counsel), for appellees U.S., Secretary of the Treasury, Com'r of I.R.S.,
and Alvin D. Lurie.
Leonard Koerner, New York City (W. Bernard Richland, Corp. Counsel,
City of New York, James G. Greilsheimer, L. Kevin Sheridan and Judith
A. Levitt, New York City, of counsel), for appellees, Trustees of Teachers
Retirement System.
Before MOORE, SMITH and MANSFIELD, Circuit Judges.
J. JOSEPH SMITH, Circuit Judge:

This is an appeal from a judgment dismissing an action brought by a

beneficiary of a municipal pension fund against the trustees of the fund and
others alleging deprivation of constitutionally protected rights, violations of the
federal securities laws, and breach of fiduciary duty under state law, and
seeking injunctive, declaratory and other relief. The United States District
Court for the Southern District of New York, Lawrence W. Pierce, Judge, held
that appellant lacked standing to sue under the federal securities laws, and
dismissed the complaint in its entirety, entering judgment accordingly. We find
that appellant has standing to sue under the federal securities laws, and reverse
the dismissal as to the individuals sued as fund trustees.

For the purpose of this appeal from a judgment granting a motion to dismiss,
we treat allegations of the complaint as admitted. Drachman v. Harvey, 453
F.2d 722, 724 (2d Cir. 1972); Murray v. City of Milford, 380 F.2d 468, 470 (2d
Cir. 1967).

I.
3

The facts alleged may be summarized as follows.

Appellant, Alfred Kirshner, was employed as a high school science teacher by

the Board of Education of the City of New York from 1928 to 1953. During
these years he was obliged to contribute to the Teachers Retirement System of
the City of New York ("the System") by means of compulsory payroll
deductions credited to the System's annuity savings fund. The City of New
York ("the City") was required to pay into the System's contingent reserve fund
amounts sufficient to provide for a pension reserve at the time of his retirement.
At Kirshner's retirement in 1953, accumulated deductions were transferred on
the books of the System to the System's annuity reserve fund and an amount
equal to the employee's pension reserve was transferred to the System's pension
reserve fund number one. Since then he has received monthly retirement
allowances consisting of an annuity and a pension. In 1976 his retirement
allowances totaled $3,035.68.

The System is controlled by the Teachers Retirement Board ("the Board"). The
Board has the power to purchase securities for and to sell securities held by any
of the System's funds. The Board's seven members are trustees for the fund.
Three are elected by active employees of the Board of Education. The
concurrence of at least one of these three is necessary for any decision of the
Board. Retired employees have no representative on the Board.

As of June 30, 1974, about a year before the beginning of the City's financial
crisis, the System had $1.85 billion in assets and $4.62 billion in accrued
liabilities. Apparently, amounts paid in by the City had not been enough to
establish adequate pension reserves. Of the $1.85 billion in assets, $1.62 billion
had been transferred into the annuity reserve fund or the pension reserve fund
number one or successor funds. The remaining $0.23 billion was held in the
annuity savings fund and the contingent reserve fund or their successor funds.
Of the $4.62 billion in accrued liabilities, $1.62 billion was owed to reserves
for retired employees and $3 billion was owed to reserves for active employees.
Thus, there was only $0.23 billion set aside for pensions of active employees
although the System had outstanding retirement obligations to these employees
of $3 billion. Consequently, when the City's crisis began, the principal concern
of retired employees was protecting the integrity of the System's annuity
reserve fund and pension reserve fund, or successor funds, while the interests of
the Board of Education's active employees lay in assuring that the city had
funds to put into the System, so that the employees' retirement allowances
could be paid when they became due, and in seeing to it that the City was able
to pay their salaries.

In June, 1975 the Legislature of the State of New York instituted the first of
several steps in response to the City's financial plight. It established the
Municipal Assistance Corporation for the City of New York ("MAC") "to assist
the city of New York in providing essential services to its inhabitants . . . and in
creating investor confidence in the soundness of the obligations of such city . . .
." 1975 N.Y. Laws, ch. 169 3031. MAC was authorized to issue up to $3
billion in notes and bonds. It was to purchase and accept for exchange shortterm obligations of the City. On September 9, 1975, the Legislature passed the
New York State Financial Emergency Act for the City of New York ("the
Emergency Act") which "authorized and directed" certain purchases of MAC
bonds and declared these bonds "reasonable, prudent and proper investments
for . . . all trustees and other fiduciaries . . . ." 1975 N.Y. Laws, ch. 870 14.
The System was obliged to purchase bonds in the principal amount of $250
million. On September 29, 1975, however, the Court of Appeals of the State of
New York struck down that portion of the Emergency Act which "directed"
pension fund trustees to invest in MAC bonds as violative of the constitution of
the state. Nevertheless, on October 17, 1975, to enable the City to avoid
default, the Board agreed to acquire MAC bonds in the principal amount of
$150 million. Concurrence of Board members elected by active employees
followed concessions to active employees in contract negotiations between the
City and representatives of the active employees. Still the crisis deepened. On
November 15, 1975, the City defaulted on its maturing short-term obligations
and declared a moratorium on all payments. Between August 21, 1975 and

November 20, 1975, the Board purchased MAC bonds in the principal amount
of $275 million for the System's funds.
8

On November 25, 1975 MAC, several commercial banks, and five City pension
systems entered into an agreement ("the Agreement") pursuant to which the
Board agreed to acquire City serial bonds in the principal amount of at least
$860 million over a period of about 30 months. In addition on February 1, 1976
the Board agreed to exchange the MAC bonds held by the System for longterm MAC bonds bearing 6% Interest per year.

The banks, according to the complaint, "while ostensibly acting as disinterested

parties, while using their reputations for fiscal integrity and sound business
judgment to induce the 'TRUSTEES' to purchase $860 million of NYC serial
bonds, failed to make full disclosure of the fact that they had sold over $2
billion of their NYC short term notes in the previous year." The banks "fail(ed)
to disclose the extent and dollar value of the City bonds held by them as assets
and as trustee and fiduciary for clients, (thereby) concealing material facts that
would affect an informed investment decision." It is further alleged that the
members of the Board, when entering into the Agreement, "were well aware
that buying NYC bonds at that time was wrongful because the City was
insolvent. In April 1975 Standard & Poor had completely suspended rating
NYC bonds. Moody's had downrated them to unsatisfactory Caa on November
3, 1975. . . . Not one bank, insurance company, investment company, trade
union fund or corporation in the USA would at that time advance NYC any
funds, but the 'TRUSTEES' volunteered to advance $860 million of the assets
of the plaintiff . . . ." Moreover, the Board "accepted the reduced 6% Rate on
Moody-rated B (unsatisfactory) MAC bonds at a time when A's were selling
with 8% To 9% Returns at par."

10

The Agreement provided that the System's purchase of City bonds was
contingent upon either the issuance of a ruling by the Internal Revenue Service
("IRS") or the enactment of federal legislation providing that the proposed
purchases shall not constitute "prohibited transactions" within the meaning of
503(b) of the Internal Revenue Code of 1954, as amended ("the Code"), or
otherwise adversely affect the tax status of the System's pension funds under
401(a) of the Code.

11

On December 4, 1975, the Board requested the IRS to rule that certain
purchases of City serial bonds would not result in "prohibited transactions" or
violate any provisions of 401(a). However, it is alleged that "in their requests
to IRS for approval (the Board) did not make full disclosure in five instances
which indicate violations of Security Exchange laws and regulations 10(b) and

Rule 10b-5." It did not disclose (1) that the banks had sold City obligations in
the previous year; (2) that City serial bonds were to be purchased at par when
available at a discount; (3) the purchases would increase fund holdings of City
obligations "to 32%"; (4) the Board intended to sell sound corporate bonds to
raise cash to make these purchases; (5) the purchases were not for the exclusive
benefit of the beneficiaries.
12

Alvin D. Lurie, an Assistant Commissioner of the IRS, issued the requested

rulings. Shortly thereafter, the Board allegedly sold "sound, liquid, varied,
highly-rated corporate bonds" to buy "highly speculative, poorly rated, illiquid,
high risk NY City obligations," and purchased "at par $182 million NYC serial
bonds which were available at discounts (of approximately 20%)." These
purchases "increased the (pension funds') holdings of NYC obligations as of
December 15, 1975 to 32%."

13

On February 1, 1976, pursuant to the Agreement, the System exchanged MAC

bonds in the principal amount of $215 million for a like amount of long-term
MAC bonds bearing interest at 6% Per year. The bonds which it gave up were
short-term obligations bearing interest at 11% Per year.

14

In February, 1976 hearings were held on special federal legislation which

would provide that parties to the Agreement would not be considered to violate
401(a) or 503(b) of the Code as a result of purchases or acquisition of MAC
or City serial bonds. On March 19, 1976 Congress enacted Public Law 94-236
which granted such protection of all parties for all such purchases or
acquisitions made on or after August 20, 1975.

15

By December 31, 1976 the Board had "increas(ed) the (funds') holding(s) of
NYC obligations to $782 million or 36% Of total assets." The Board voted to
acquire these bonds "(i)n order to maintain . . . contract benefits, full
employment at high wages and high city pension contributions to benefit the
presently employed teachers . . . ." As a result of the Board's actions, the assets
of the pension funds have been "leached and dissipated." The "funds are being
used to pay off NYC bonds owned by the Clearing House Banks and their
clients at the expense of the minority pensioners, including plaintiff."

16

Under the Agreement, the Board was obliged to purchase additional City serial
bonds in the principal amount of $504 million by June 30, 1978, "making 51%
Of (the System's) assets NYC obligations . . . ."

II.

17

In February, 1977, Kirshner Pro se commenced the instant action against the
United States of America, the Secretary of the Treasury, the Commissioner of
the Internal Revenue Service, Alvin D. Lurie in his capacity as Assistant
Commissioner of the Internal Revenue Service, and named members of the
Board, individually and as trustee of the System's funds.

18

In his complaint, in addition to the facts alleged above, Kirshner claims that
"the 'TRUSTEES' intent to manipulate and deceive was expressly indicated by
the 'AGREEMENT.' "

19

He maintains that "(t)he 'AGREEMENT' was tainted by fraud by 'concealing

material facts to which importance could be attached that would affect informed
investment decision,' " and states that the Agreement "was not made at arms
length." The conduct of the members of the Board, Kirshner contends, violates
17(a) of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. 77q, 10(b)
of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. 78j(b)
and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5, and constitutes
a breach of fiduciary duty under state law. In addition, Kirshner alleges that
federal and state appellees have deprived him and other retired employees of
constitutional rights granted by article I, 10 and by the fifth and fourteenth
amendments to the Constitution of the United States, and that Public Law 94236 is unconstitutional.

20

As relief Kirshner seeks a declaration that Public Law 94-236 is

unconstitutional and an injunction preventing its application, an order setting
aside the alleged IRS rulings, an order prohibiting the Board members from
purchasing additional City obligations, another order requiring them to
exchange the MAC bonds bearing 6% Interest for those purchased initially,
and, finally, restitution for all losses incurred as a result of entering into and
carrying out the terms of the Agreement.

21

Appellees moved separately to dismiss Kirshner's complaint for lack of

jurisdiction over the subject matter and for failure to state a claim upon which
relief can be granted. Kirshner cross-moved for a preliminary injunction. The
district court, holding that Kirshner lacked standing to sue under the federal
securities laws, granted the motions to dismiss and denied the cross-motion as
moot. Kirshner appealed from the district court's order and we assumed
jurisdiction.1

III.
22

We agree with the district court that no basis is stated for the action against the

22

We agree with the district court that no basis is stated for the action against the
United States and the federal officials. That claim is based on Public Law 94236 and on the IRS ruling that the contemplated transactions would not
constitute "prohibited transactions" which would deprive the securities of their
tax-exempt status under the federal statutes. We fail to see in the claim any
harm to the plaintiff or the funds, or any basis for the plaintiff's standing to
challenge the ruling.

23

Kirshner makes a constitutional claim of impairment of the obligation of

contract. But while his pension rights arise from a contract,2 his claims of
impairment must fail. Article I, 10 of the Constitution of the United States
declares that "(n)o State shall . . . pass any . . . Law impairing the Obligation of
Contracts . . . ." This prohibition, however, "is not an absolute one and is not to
be read with literal exactness like a mathematical formula." Home Building &
Loan Ass'n v. Blaisdell, 290 U.S. 398, 428, 54 S.Ct. 231, 236, 78 L.Ed. 413
(1934). A state may take necessary measures in pursuit of legitimate state goals
without bar by the contract clause even though some contract rights may to
some degree be modified or affected. City of El Paso v. Simmons, 379 U.S.
497, 85 S.Ct. 577, 13 L.Ed.2d 446 (1965); Home Building & Loan Ass'n v.
Blaisdell, supra, 290 U.S. at 398, 54 S.Ct. 231; Koch v. Yunich, 533 F.2d 80,
86 (2d Cir. 1976). The protection of the fiscal integrity of the City of New York
is such a legitimate state goal. The Board's members are authorized by state law
to invest in both MAC and City serial bonds. Administrative Code of the City
of New York, ch. 20 B20.31.0; N.Y. Public Authorities Law 3018
(McKinney Supp.1970-77); N.Y. Banking Law 235(4) (McKinney 1971);
Tron v. Condello, 427 F.Supp. 1175, 1187-88 (S.D.N.Y.1976). These state laws
appear to be necessary to a valid state purpose protecting the fiscal integrity of
the City by broadening the available markets for its securities and therefore not
in contravention of article I, 10 of the Constitution.

24

Kirshner's constitutional claim of deprivation of property without due process

also affords him no relief. The federal and state enactments pursuant to which
the challenged actions were carried out are rationally related to lawful
governmental objectives and are not unreasonable, arbitrary or capricious.
Assuming, Arguendo, that Kirshner has constitutionally protected property
right, see Board of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 33
L.Ed.2d 548 (1972); Tron v. Condello, supra, 427 F.Supp. at 1189; Robbins v.
Police Pension Fund, 321 F.Supp. 93, 97 (S.D.N.Y.1970), he cannot be said to
have been deprived of that right without substantive or procedural due process.
See generally Nebbia v. New York, 291 U.S. 502, 525, 54 S.Ct. 505, 78 L.Ed.
940 (1934); Koch v. Yunich, supra, 533 F.2d at 84. Nor has Kirshner been
denied equal protection of the laws by either the federal or state enactments, for
he has not demonstrated any arbitrary or unreasonable classification in the

statutes. See Reed v. Reed, 404 U.S. 71, 76, 92 S.Ct. 251, 30 L.Ed.2d 225
(1971).
25

Kirshner's claim that Public Law 94-236 and the IRS rulings violate the fifth
and fourteenth amendments is likewise without merit. Their effect is solely to
remove any question as to the tax exempt status of the securities involved and
could only benefit, rather than damage, the City and its creditors. The district
court was correct in dismissing appellant's constitutional claims.

26

The situation is different, however, as to the Securities Acts claims against the
non-federal defendants. We are concerned at this point only with whether
Kirshner has alleged facts sufficient to give him standing to sue under the
securities laws and to form a basis for relief if liability is established on trial.
We, of course, intimate no opinion as to the truth of his allegations. The court
below, citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct.
1917, 44 L.Ed.2d 539 (1975), held that Kirshner lacks standing to assert a
private cause of action under 10(b) of the 1934 Act, 15 U.S.C. 78j(b) 3 and
Rule 10b-5, 17 C.F.R. 240.10b-5,4 promulgated thereunder. We disagree. To
be sure, in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), Cert.
denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), affirming dismissal
of a derivative action against a director for violation of 10(b) where the
director had sold his shares in the corporation to an outside purchaser, we stated
that 10(b) and Rule 10b-5 "extended protection only to the defrauded
purchaser or seller," Id. at 464.

27

Since its promulgation in 1952, the Birnbaum rule has been adhered to
consistently in this circuit; see International Controls Corp. v. Vesco, 490 F.2d
1334, 1346 n. 16 (2nd Cir.), Cert. denied, 417 U.S. 932, 94 S.Ct. 2644, 41
L.Ed.2d 236 (1974). We have, however, recognized that a shareholder who has
not purchased or sold shares may bring a derivative action under 10(b)
against corporate insiders on behalf of the defrauded corporation if the
corporation has bought or sold securities. Schoenbaum v. Firstbrook, 405 F.2d
215, 219 (2d Cir. 1968), Cert. denied sub nom. Manley v. Schoenbaum, 395
U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); Ruckle v. Roto American
Corp., 339 F.2d 24, 27-28 (2d Cir. 1964). And in approving the Birnbaum rule
in Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. 723, 95 S.Ct. 1917,
44 L.Ed.2d 539, the Court took cognizance of this interpretation of the rule, Id.,
at 748-49.

28

We think the beneficiary of a pension trust, like the shareholder in a derivative

suit, has standing to attack securities frauds perpetrated or threatened by the
trustees of his fund. A number of courts have taken the view that a trust

beneficiary may sue under Rule 10b-5. See, E. g., James v. Gerber Products
Co., 483 F.2d 944 (6th Cir. 1973); Heyman v. Heyman, 356 F.Supp. 958
(S.D.N.Y.1973). Treating the allegations of the Pro se complaint liberally as we
must under Haines v. Kerner, 404 U.S. 519, 92 S.Ct. 594, 30 L.Ed.2d 652
(1972), it would appear that purchase and sale of securities is sufficiently
involved, see Superintendent of Insurance v. Bankers Life & Casualty Co., 404
U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), and that the plaintiff has also
alleged the knowledge and intent to defraud required by Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). 5
29

The court below also held that Kirshner has no claims under 17(a) of the
1933 Act, 15 U.S.C. 77q, because no private cause of action is recognized
under this section. We disagree with this conclusion. See Daniel v. International
Bhd. of Teamsters, 561 F.2d 1223, 1244-46 (7th Cir. 1977), Cert. granted 434
U. S. 1061, 98 S.Ct. 1232, 55 L.Ed.2d 761 (1978) Cert. granted, (1978).6 We
left the question open in Globus v. Law Research Service, Inc., 418 F.2d 1276,
1283-84 (2d Cir. 1969), Cert. denied, 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d
93 (1970), noting, however, Judge Friendly's remark concurring in SEC v.
Texas Gulf Sulphur Co., 401 F.2d 833, 867 (2d Cir. 1968), that there was little
practical point in denying the existence of an action under 17 once it is
established that an aggrieved buyer has a private action under 10(b) of the
1934 Act.

30

We agree with the Seventh Circuit that the language of 17 is broad enough to
imply a private right of action and that the beneficiaries of the trust are persons
claiming injury for the alleged fraud in purchase and sale of securities.

31

Kirshner has standing, as a beneficiary of the fund, to bring this action on

behalf of the fund against those alleged to have defrauded the fund in its
purchase of securities, and the complaint may be interpreted to charge
participation by these defendants in fraudulent sale of securities by and to the
fund.

32

The district court dismissed Kirshner's state law claims for breach of fiduciary
duty. Since Kirshner states a claim under 10(b) and 17, on remand he may
assert his pendent state claims. United Mine Workers v. Gibbs, 383 U.S. 715,
86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). Of course, as we have said, we intimate
no opinion as to the merits of any of the claims.

33

Judgment reversed. Dismissal of Rule 10b-5 and 17 claims and pendent state
law claims reversed. Dismissal of other claims affirmed. Case remanded for

proceedings not inconsistent with this opinion.

MOORE, Circuit Judge (dissenting):
34

I would affirm, largely for the reasons set forth in Judge Pierce's well-reasoned
opinion.

35

Plaintiff is the recipient of a pension from the New York City Teachers'
Retirement System. He retired in 1953 and since then has been on a pension
$3,000 a year. There is no allegation that any of the acts complained of have
caused his pension to cease or payments to have been diminished. Indeed,
paragraph 9b of his complaint reveals that he is unable to allege any injury to
his interests because his retirement account was fully funded at the time of his
retirement and apparently has remained fully funded up to this day.
Furthermore, his actuarial calculations show that his expectant lifetime pension
is $39,000; the.$1.6 billion in the Funded Assets Account of the Retirement
System amounts to $64,600 for each retiree, more than enough to fund his
expected pension. Hence, Kirshner has not been injured by the acts complained
of. See Association of Data Processing Service Organizations, Inc. v. Camp,
397 U.S. 150, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970).

36

Not only has Kirshner failed to allege facts to support his standing to sue, but
also, as appears from Judge Pierce's opinion, he has failed to state a cause of
action on his nonsecurities law claims. The gravamen of his complaint is that
certain investments in New York City bonds made recently, at a time when the
City was in dire financial straits, were improvident. In view of the prominence
given to the City's financial plight in the public press, I am willing to take
judicial notice that investment in its securities would be highly questionable.
However, in addition to the many burdens placed upon the judiciary, I am
unwilling to add that of investment counsel to an employees pension fund to the
list. Support for this position is found in a decision of New York's highest court
in Sgaglione v. Levitt, 37 N.Y.2d 507, 375 N.Y.S.2d 79, 337 N.E.2d 592
(1975) and in Judge Conner's decision in Tron v. Condello, 427 F.Supp. 1175
(S.D.N.Y.1976). Whatever relief, if any, to which plaintiff may be entitled may
be had through the state courts where breach of fiduciary duty may be asserted
and equitable relief and damages, if any, awarded.1

37

The majority opinion supports most of Judge Pierce's decision and disagrees
only with his treatment of Kirshner's securities law claims. Even if Kirshner has
standing to bring this action, as the majority finds he does, his complaint should
still be dismissed for failure to state a cause of action under 10(b) of the

Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and 17 of the Securities

Act of 1933, 15 U.S.C. 77q. In my opinion, the majority's holding that the
complaint states a cause of action under 10(b) and 17 constitutes an illadvised extension of the reach of the antifraud provisions of the securities laws
as they have been applied to allegations of corporate mismanagement.2
38

There has been a tendency over recent years to rely upon various sections of the
Securities Exchange laws to create causes of action by the recital of section
numbers such as 10(b), Rule 10-b(5) and 17, as if the mere recital had a
talismanic effect and would bring some kind of a triable action into being.

39

The private cause of action under 10(b) was created by federal courts in order
to effectuate congressional policies arguably embodied in the securities
legislation passed in 1933 and 1934. Thus the broad extension of the private
10(b) action has not been mandated by Congress; it is rather a matter of the
courts seeking to erect a rational enforcement system on a very shaky base.
However, a rational enforcement system ought to take into account the latest
efforts of Congress to regulate retirement trust fund managements. In the
Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.
1001-1381, Congress has established detailed and complex rules to control
pension fund managers. In pertinent part, ERISA provides that pension fund
trustees have a duty of undivided loyalty to the beneficiaries, 29 U.S.C. 1104,
and regulates the extent to which a pension fund can hold securities issued by
the employer, 29 U.S.C. 1106-1107. ERISA contains complex disclosure
and reporting requirements, but nowhere does it require that trustees must
disclose in advance to the beneficiaries their proposed investment transactions,
29 U.S.C. 1021-1026. If Congress had wanted to require pension fund
trustees to disclose investment transactions, Congress would have enacted such
a rule. Although this case involves a public employee pension fund, the
majority's holding that a pension beneficiary has a cause of action against the
trustee is equally applicable to private pension funds which are covered by
ERISA. Moreover, since Congress has elected not to burden municipal
employee pension funds with ERISA's requirements, 29 U.S.C. 1003, a
federal court should not create a new disclosure duty on the dubious foundation
of 10(b) and apply it to public employee pension funds in this case. I would
find that Kirshner's complaint has not stated a federal cause of action upon
which relief can be granted.

40

In short, I believe that Judge Pierce has correctly analyzed the amended
complaint (and the law applicable thereto) and found it wanting. With that
analysis I concur and hence would affirm.

On Petition for Rehearing

41

J. JOSEPH SMITH, Circuit Judge.

42

The appellee-trustees have filed a petition for rehearing in light of the Supreme
Court's recent decision in International Brotherhood of Teamsters v. Daniel,
439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979). This case, however, does
not involve the issues decided in Daniel, which held that an interest in a noncontributory, compulsory pension plan is not a security within the meaning of
2(1) of the Securities Act of 1933, 15 U.S.C. 77b(1), or 3(a)(10) of the
Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(10). Kirshner does not
claim that his pension interest under the System is a security. He contends
rather that fraud was perpetrated by the trustees in connection with the fund's
purchase of MAC and NYC bonds, which the trustees cannot and do not
contend are not securities. Thus Kirshner merely is suing derivatively as a trust
beneficiary to attack the fraud allegedly perpetrated upon the fund by the
trustees in connection with the purchase of these securities. See, Kirshner v.
United States, 603 F.2d 234, 240 (2d Cir. Nov. 30, 1978).

43

Daniel also has no effect on our conclusion that a private right of action exists
under 17(a) of the 1933 Act, 15 U.S.C. 77q, since the Court found it
unnecessary to reach that issue. 439 U.S. at 557 n. 9, 99 S.Ct. 795.

44

The petition for rehearing is denied.

MOORE, Circuit Judge (concurring):

45

On January 16, 1979 we affirmed by order Judge Conner's opinion in Withers

v. Teachers Retirement System, 447 F.Supp. 1248 (S.D.N.Y., 1978), Aff'd by
order, 595 F.2d 1210 (2d Cir. 1979). Judge Conner considered at length all of
the facts which underlie Kirshner's allegations. He found that the Teachers
Retirement System Trustees had not breached their fiduciary duties to the TRS
beneficiaries. It is unlikely that Kirshner will be able to prove that the Trustees
have violated the securities laws.

46

Since Kirshner will have to establish at trial that the Trustees did breach their
fiduciary duties, overcoming at least the Stare decisis effect of Withers, I think
that a rehearing at this time would be a waste of judicial energy.

The judgment entered below dismissed the complaint, but not the action.

The judgment entered below dismissed the complaint, but not the action.
Appellees have not raised this issue on appeal. However, under 28 U.S.C.
1292, jurisdiction may be predicated upon the district court's denial of
appellant's cross-motion for a preliminary injunction

The Constitution of the State of New York, article V, 7 provides that after
May 1, 1940, membership in any pension or retirement system of a civil
division of the state "shall be a contractual relationship, the benefits of which
shall not be diminished or impaired."

Section 10(b) of the 1934 Act makes it

unlawful for any person . . . (t)o use or employ, in connection with the purchase
or sale of any security . . . any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the Commission may prescribe
as necessary or appropriate in the public interest or for the protection of
investors.

Rule 10b-5 reads:

Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails, or of any
facility of any national securities exchange,
(1) To employ any device, scheme or artifice to defraud,
(2) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(3) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person, in connection with the
purchase or sale of any security.

The dissent evidences concern that the provisions of the Employee Retirement
Security Act of 1974 (ERISA), particularly requirements concerning disclosure,
preclude a cause of action under the Securities Acts in this case. We believe
that this concern is misplaced. First, it is not at all clear that the specific
requirements of ERISA preclude actions under the broader requirements of the
Securities Acts. See Daniel v. International Bhd. of Teamsters, 561 F.2d 1223,
1248 (7th Cir. 1977), Cert. granted, 434 U.S. 1061, 98 S.Ct. 1232, 55 L.Ed.2d
761 (1978). (ERISA should be read as "complementary" to the anti-fraud
provisions of the Securities Acts.) Second, the cause of action here does not

stem from a specific duty to disclose on the part of the trustees. In addition to a
general duty of disclosure, James v. Gerber Products Co., 483 F.2d 944 (6th
Cir. 1973), plaintiff's complaint, read liberally, alleges a conspiracy to defraud
in violation of Rule 10b-5, which is in no way tied to a specific duty of
disclosure. See Ferguson v. OmniMedia, 469 F.2d 194 (1st Cir. 1972); Herpich
v. Wilder, 430 F.2d 818 (5th Cir. 1970), Cert. denied, 401 U.S. 947, 91 S.Ct.
935, 28 L.Ed.2d 230 (1971)
6

See also, Newman v. Prior, 518 F.2d 97 (4th Cir. 1975); Surowitz v. Hilton
Hotels Corp., 342 F.2d 596 (7th Cir. 1965); Wulc v. Gulf & Western Ind., 400
F.Supp. 99 (E.D.Pa.1975); Contra, Shull v. Dain, Kalman & Quail, Inc., 561
F.2d 152 (8th Cir. 1977); Scarfarotti v. Bache & Co., 438 F.Supp. 199
(S.D.N.Y.1977); Gunter v. Hutcheson, 433 F.Supp. 42 (N.D.Ga.1977);
Architectural League of New York v. Bartos, 404 F.Supp. 304 (S.D.N.Y.1975);
Welch Foods v. Goldman Sachs, 398 F.Supp. 1393 (S.D.N.Y.1974)

The availability of a state court remedy for breaches of fiduciary duty and the
traditional role of state law in regulating trust fund fiduciaries add additional
support to my belief, explained later in the text, that Kirshner has failed to state
a cause of action under 10(b). See Santa Fe Industries, Inc. v. Green, 430 U.S.
462, 478, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977)

See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 475 n.15, 97 S.Ct. 1292,
51 L.Ed.2d 480 (1977) and the cases cited therein; Jacobs, How Santa Fe
Affects 10b-5's Proscriptions Against Corporate Mismanagement, 6 Sec.
Reg.L.J. 3 (1978)